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creates an unrealizable asset. As a result, respondent argues
that the favorable financing intangible assets cannot be valued
separately, without looking at the value of the underlying
mortgages. According to respondent, petitioner’s valuation
method results in overvaluation, double counting of assets, and
accounting irregularities because petitioner marks its
liabilities to market without making the corresponding downward
adjustment to its assets.
a. Favorable Financing Is an Asset
Respondent’s contra-liability argument revisits the question
of whether favorable financing can be an amortizable asset. We
have already rejected respondent’s argument that favorable
financing is a liability. See Fed. Home Loan Mortgage Corp. v.
Commissioner, 121 T.C. at 269, where we stated:
Respondent argues that petitioner’s favorable
financing represents a “liability”, not an “asset”.
Respondent claims that petitioner is “attempting to
adjust, for tax purposes, the asset side of its balance
sheet to account for an overstatement in fair market
value terms of its liabilities.” We cannot agree with
respondent’s proposed characterization of petitioner’s
favorable financing as a liability. Indeed, as
petitioner points out, there is a valuable economic
benefit associated with the below-market interest rates
on its financing arrangements as of January 1, 1985.
It is this economic benefit which petitioner claims as
an intangible asset and upon which it bases its claimed
amortization deductions.
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